What is a Qualified Dividend?

A qualified dividend is a dividend eligible to incur capital gains tax.

How Does a Qualified Dividend Work?

For example, let's assume that John owns 10,000 shares of Company XYZ stock, which pays $0.20 per year in dividends. In total, John receives 10,000 x $0.20 = $2,000 per year in dividends from Company XYZ. Because Company XYZ pays qualified dividends, John Doe must pay capital gains tax (say, 15%) on the dividends rather than ordinary income tax (say, 35%) on the dividends.

In order to be a qualified dividend, the dividend must come from an American company (or a qualifying foreign company), must not be listed as an unqualified dividend with the IRS and must meet a required holding period. In general, the holding period is at least 60 days for common stock, 90 days for preferred stock, and 60 days for a dividend-paying mutual fund.

Why Does a Qualified Dividend Matter?

Capital gains taxes are usually lower than ordinary income taxes, which means that qualified dividends can save investors money on their tax bill.